Audit Blues

BURDENED BY THE HALF-BILLION dollar Owens Lake Dust Mitigation Project, along with other environmental-restoration projects in Owens Valley and a crumbling infrastructure, L.A.’s Department of Water and Power is planning to raise water rates by 3.9 percent on July 1, and by another 3.5 percent by mid-2007, according to an internal memo from general manager Ron Deaton.

The memo, obtained by the L.A. Weekly, also calls for unspecified job cuts and surcharges for the costs associated with developing renewable energy and for dealing with the volatile natural-gas market. The memo is based on recommendations by the Barrington-Wellesley Group, an auditing firm hired to analyze water and power revenues, rate structures and spiraling costs at the troubled utility.

The group calls for cuts of $20 million over the next five years and the elimination of the “test bill” subsidy, which capped rate increases for high-volume business customers and was supposed to be phased out. The subsidy was enacted after a 1993 rate restructuring aimed at encouraging conservation by setting rates based on the volume of water consumed by retail customers.

The DWP also should be looking to cut costs at every level and “wring out” costs by freezing or reducing approved expenses from all departments, beginning with next year’s budget, the memo states. The auditors also singled out the Owens Lake fiasco — a project that is back out to bid and is undergoing a “forensic” audit. Their report to the DWP recommends a separate water-rate surcharge, or changes to existing surcharges, to make up for the out-of-control costs of reducing dust on the 100-square-mile dry lakebed.

Recently, the Board of Commissioners asked Deaton and his staff for reports on the status of DWP’s $6 billion pension and the overtime paid to employees. The numbers were alarming: The pension is underfunded by $400 million, the board found, and annual overtime costs topped $50 million last year, a sharp increase from recent years and among the highest in the city. Deaton was tapped as manager by former mayor Jim Hahn in November 2004.

The Barrington-Wellesley Group delivered more bad news for the power system and the DWP’s technology division. Consistent with Mayor Antonio Villaraigosa’s mandate that the DWP achieve a 20 percent renewable-energy standard by 2010, the group recommends a renewable-portfolio surcharge. Because of unstable natural-gas rates the group also recommends a natural-gas surcharge to relieve pressure on the DWP, which is $95 million over budget in that area. The DWP should eliminate long-term-contract discounted power rates, the memo states.

By eliminating discounted power rates for large customers, automating meter readings and reducing non-labor costs, the DWP can save $119 million over five years, according to the audit.

The DWP has always been the mansion on the hill – its salaries are the highest in the country for public utilities and its culture and policies are distinct from the rest of the city. Now the mansion is crumbling. Auditors are recommending better coordination between DWP and the city on shared services, as a means of cutting costs.

In an effort to minimize further water and power rate hikes, the group calls for a greater investment in information technology, an updated integrated-resource plan and an overhaul of the DWP’s workforce-management practices. “DWP has no basis for determining whether its Power Operations organization is over- or understaffed because it does not have an effective, comprehensive, manpower-planning system,” the Barrington-Wellesley Group’s report states. “The failure to spend sufficient funds on electric transmission and distribution during the last several years has adversely affected its reliability, customer service and revenue.”

Finally, the group recommends that the DWP “consider outsourcing non-core functions and invest in automation to reduce the number of full-time employees.”

The DWP has more than 8,000 employees, 95 percent of whom are members of the International Brotherhood of Electrical Workers Local 18. In response to the recommendation to cut staff, Deaton wrote: “DWP’s preference is to have its own employees perform water- and power-related services that are required on an ongoing basis. DWP generally contracts out for services when it is not feasible or economic to have DWP employees perform such work, including peak-workload demands or providing special expertise. DWP is currently working to improve the process of evaluating these situations and will continue to work closely with its labor unions.”